Tempe braces for lawsuit after passing prevailing wage policy for contractors

Tempe officials passed a new ordinance that requires companies contracted to work on city projects to pay workers a fair wage, a move that will almost certainly get the city sued by groups that believe the policy is illegal under state law.

The ordinance is called a “prevailing wage” policy. Its aim is to ensure fair pay for workers on city construction contracts and prevent the abuse of cheap and potentially undocumented labor. The prevailing wage is almost always higher than the minimum wage requirements in a given area.

Federal officials set prevailing wages based on what is typical for different worker groups in specific places. They might look at what the average pay and benefits are for landscapers in the Valley, and then use that to pinpoint the normal level of compensation ― or prevailing wage ― for Phoenix-area landscapers.

The ordinance could help Tempe crack down on companies that cheat the city’s bidding process by underpaying their employees and offering to do a public-funded project more cheaply than other companies that pay their workers fairly.

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But it does come with downsides. It will cost Tempe as much as $7.3 million more to fund city projects each year under the new rule, and it likely will land Tempe in a lawsuit with the libertarian-leaning Goldwater Institute that would sap even more city resources.

“Does (passing this) mean we’ll get sued? Almost certainly. I think that’s what is to be expected at this point. Is there value in doing the right thing when it means having to fight? Absolutely,” said City Councilmember Randy Keating, who has spearheaded the initiative since 2019.

Goldwater is already suing Phoenix and Tucson over their prevailing wage rules. The think tank implied in an April 24 letter that Goldwater also would take aim at Tempe if it passed a similar policy, writing that the city should “avoid the possibility of … costly defense of this illegal mandate in court.”

Goldwater argues that the policy is illegal because a 1984 state law bans cities from requiring minimum wage. But Arizona Attorney General Kris Mayes issued an opinion supporting the legality of prevailing wages in June, so it’s not totally clear where matters stand.

“Now, is prevailing wage legal? I don’t know. I’m not a lawyer. But I know very smart lawyers who tell me that it is, and I know very smart lawyers who tell me that it isn’t,” Keating said. “It’s ambiguous enough that I think this is worth pursuing.”

Keating also took on some of the other criticisms of the proposed prevailing wage policy at Thursday’s meeting.

Ricardo Carlo, the president of the Associated Minority Contractors of Arizona, leveled one of those criticisms last month when he claimed the policy was attempting to address a nonexistent issue.

He said that many companies already “pay at or above prevailing wage,” so he’s “confused as to why this is a problem and why it needs to be remedied.” Carlo added that the policy “just adds an administrative burden” for contractors because of extra paperwork.

How it went down elsewhere: Phoenix passes prevailing wage rule again, inviting lawsuits from business community

But Keating pointed to a recent article by The Arizona Republic about Valley Metro having to pay more than $600,000 in back pay to contract workers who built the light rail. They were misclassified and paid less than they were owed — one of the exact problems Tempe’s new policy hopes to prevent.

“So, is there a problem here? Yeah, I think there is. I think we can take reasonable steps to prevent any sort of victimization of the people who we’re relying on to build our public works projects. I think we should absolutely do that,” he said.

Another concern about the prevailing wage policy was that Tempe would absorb the extra costs either by reducing the scope of projects, delaying projects or eliminating them, according to Tom Duensing, the city's chief financial officer.

“The revenues won’t increase, (so) what we’ll have to do is work on the expenditure side of the ledger,” he said. Those decisions would be made on a case-by-case basis.

But the extra project costs the policy would generate wouldn't be any more than 1% of Tempe’s $616 million project budget, so its impact on the projects themselves likely would be insignificant.

“Compared to the amount of money and the amount of projects that we do in the city of Tempe annually, it is not a significant amount,” Keating said. “In the bigger picture, it is a small price to pay to ensure equity and fairness in the city.”

Councilmember Doreen Garlid raised concerns about taking on those extra costs at a time when Tempe is trying to cope with the loss of nearly $21 million in annual revenue because the Arizona Legislature eliminated the state’s rental tax.

She mentioned that lawmakers also may try to nix the food tax once again, which would cost Tempe another $8 million annually.

Keating pointed out that the prevailing wage costs and the state tax cuts don’t impact the same buckets of city funding.

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The sales tax loss affects the city’s general fund, which is basically Tempe’s checking account that it uses to pay staffer salaries and day-to-day operating expenses.

The prevailing wage cost increase would affect Tempe's project budget, which is a separate account that only can be used to fund public infrastructure projects.

“This is an important distinction to make. The thing about the general fund and the (project fund) is that we can supplement the (project fund) with general fund money, but we can’t use (project) money to make the general fund whole,” Keating said.

“So, when we say that we’re losing the ($21) million, adding prevailing wage to the (project budget) has nothing to do with it. These are two separate issues.”

Keating’s arguments were not enough to ease Garlid’s fears about the fiscal impact. She was the only council member to vote "no" on the prevailing wage policy, citing the possibility of a lawsuit with Goldwater that Tempe City Attorney Eric Anderson said “could be substantial.”

“(The policy) guarantees two things. One, it will cost the city (millions) over the next five years. Two, it will pull Tempe into an existing lawsuit that will cost hundreds of thousands,” she said. “Those legal costs will be 100% borne by (residents) and will directly result in cuts to capital improvement projects."

“I believe in fair wages for all. I believe skilled tradesmen and women are essential ... But I also believe in being a good steward of taxpayer funds,” Garlid said, adding that she wasn’t saying “no to the prevailing wage ordinance, but no to the unknown legal cost for Tempe taxpayers.”

The ordinance will take effect June 8.

Reporter Sam Kmack covers Tempe, Scottsdale and Chandler. Follow him on X @KmackSam or reach him at sam.kmack@arizonarepublic.com.

This article originally appeared on Arizona Republic: Tempe braces for lawsuit after passing prevailing wage policy